The defence sector hasn’t been a particularly profitable space in which to do business during recent years. Part of the reason for this is a general downtrend in military spending across the developed world, with the effects of the credit crunch causing government budgets to come under pressure. That’s a key reason why BAE’s (LSE: BA) earnings per share are expected to be almost 15% lower in 2016 than they were in 2011.
Despite this, BAE’s share price has risen by 56% in the last five years as the company’s long-term prospects continue to hold great appeal. It remains well-positioned to take advantage of the likely increase in military spending as the US and developed world see government budgets come under less pressure. And with BAE’s bottom line expected to rise by 7% next year, there’s a clear catalyst to push its share price higher.
With BAE trading on a price-to-earnings (P/E) ratio of 12.9, it seems to offer good value for money. In fact, its shares could rise rapidly over the medium term if it’s able to deliver on its upbeat forecasts, thereby making it a sound buy at the present time.
Value for money
Similarly, British Airways owner IAG (LSE: IAG) also endured a difficult period in recent years, with the global economic slowdown causing its bottom line to move into the red in 2012.
Since then, it has recorded year-on-year growth in earnings, with IAG’s net profit expected to rise by 50% this year and by a further 13% next year. And with the outlook for the oil price being rather downbeat and the prospects for the global economy being upbeat (despite recent uncertainty), IAG’s longer-term profit outlook remains very positive.
Although it has recorded a share price rise of 132% in the last five years, IAG still offers excellent value for money. For example it trades on a price-to-earnings growth (PEG) ratio of just 0.5, which indicates that considerable capital gains are on offer over the coming years.
Income appeal
Meanwhile, Direct Line (LSE: DLG) remains a highly appealing income play. It has a yield of 5.5% and this puts it among the upper echelons of FTSE 100 dividend shares. However, there’s much more to Direct Line than just a high yield. For example, it’s forecast to increase its earnings by 8% in the current year, and by a further 6% next year. While this is roughly in line with the growth rate of the wider index, Direct Line trades on a P/E ratio of just 12.8, which indicates that there’s significant upward rerating potential on the cards.
Clearly, the motor insurance industry is enduring a period of change at the present time, with a rise in insurance premium tax causing a degree of disruption and uncertainty. However, Direct Line continues to offer a mix of growth, income and value while also having a low-volatility shareholder experience, as evidenced by a beta of just 0.73.
